Chapter 42
Consumer Spending and Labor Income
LEARNING OBJECTIVES
Explain how consumption has grown over the long run.
OUTLINE OF CHAPTER
I. Long Run Trends
II. Keynes and Consumer Behavior
Keynesian definitions
III. Psychology and Income Distribution
VI. Explaining the Behavior of the Labor Share
VII. Consumer Debt
KEY TERMS
average propensity to consume
the proportion of income spent fo
r consumption
average propensity to save
the proportion of savings to income
consumption function
Keynesian schedule of aggregate consumer spending at different income levels; as income
REVIEW QUESTIONS
Explain how consumption has grown over the long run.
1. Even though labor income stagnated after 1970, consumer spending rose. Explain.
2. How does wealth and debt affect spending?
Consumer income is influenced by the amount of wealth. Loss of wealth may reduce
Describe how consumption behaves over the business cycle.
3. Define average propensity to consume, average propensity to save, marginal propensity
to consume, marginal propensity to save.
4. Why does a decline in the labor share cause a decline in the propensity to consume for
the average of all consumers?
Aggregate consumer spending relies mainly on labor incomes, so we would expect the
income.
5. Why does the labor share decline as economic expansion continues?
6. Why does the ratio of consumer debt to income rise during the average expansion?
Compare and discuss determinants of aggregate consumption.
7. Why do people purchase less if they have less wealth, even if their income remains
constant?
8. How does aggregate consumption behave over the business cycle?
Consumption rises during expansions but more slowly than income. During